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The dire state of Australian agriculture

It seems crazy given our very fundamental human requirement for food that the agriculture industry could end up in the dire state it is in today. Yet that is the exactly where it finds itself. The current condition of poor production, output and return is bad for farmers, bad for investors and disastrous for the economy at large.

Interest in agriculture has been re-ignited recently with the $2.8 billion takeover offer for GrainCorp (ASX: GNC) by U.S company Archer Daniels Midland, but the poor performance of the sector over the last two years has most investors keeping the industry at arm’s length. The UN estimates that food production will need to grow by 70% by 2050 to meet increasing global demand, but the steady stream of problems hammering farmers has seen it amongst the worst performing commodities in Australia.

Part of the problem is the insatiable demand for higher yielding stocks, which acts as competition for agricultural investments. Traditional blue-chip stocks like ANZ (ASX: ANZ) and Woolworths (ASX: WOW) have been pushed to record prices by demand for their solid and reliable dividends, while the cyclical agriculture sector has been shunned. The lack of funds flowing into the industry starves it of capital to reinvest for future growth and could be the first stage of a vicious cycle. One survey of farmers in Western Australia by Muntadgin Farming Alliance found 30% did not have adequate finance for planting crops this year.

The answer may be offshore funds according to Desmond Cheung, a portfolio manager for the US$330 million World Agricultural Fund, part of the mammoth funds management company BlackRock. Mr Cheung believes offshore investors have a longer investment horizon than in Australia currently and are attracted by the inflation hedge that food production affords. To that end other listed agri-companies like Australian Agricultural Company (ASX: AAC) and Goodman Fielder (ASX: GFF) may start to emerge on the radars of overseas funds and investors, as well as the potential for more direct investment in Australian farms.

In the meantime farmers are taking their battle to stay viable to government level. Last week a $7.8 million support package was proposed to aid farmers, making grants of up to $25,000 available to farmers who meet set financing criteria.

Foolish takeaway

It should be remembered that agriculture fathered the investment maxim that today’s seeds are tomorrow’s fruits. It’s a valuable lesson to hold and with many agriculture companies trading at historically lows share prices may just yield some very healthy fruit in years to come.

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More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Regan Pearson does not own shares in any of the companies mentioned in this article. 

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